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Interest on Rs 2.5 lakh plus EPF contribution becomes taxable: Should you still invest in VPF?

Interest on Rs 2.5 lakh plus EPF contribution becomes taxable: Should you still invest in VPF?

Interest on Rs 2.5 lakh plus EPF contribution becomes taxable: Should you still invest in VPF?
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By Anshul  Feb 5, 2021 8:57 AM IST (Updated)

VPF is an extension of EPF and hence, investors can opt for VPF only if they have an EPF account.

Budget 2021 has proposed to restrict tax exemption for interest income earned on employees’ contribution to various provident funds to the annual contribution of Rs 2.5 lakh from April 1, 2021.

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According to Aarti Raote, Partner, Deloitte India, the budget change will mostly impact HNI's drawing a high salary.
However, for mid- and lower-income employees provident fund or voluntary provident fund (VPF) would still be an attractive investment, Raote believes, given that it provides an assured, secured benefit which can be tax-free on withdrawal on retirement if the employee has been a contributing member of the fund for five years or more.
"As long as the total contributions of the employee to provident fund including VPF are less than Rs 2.5 lakh, the tax exemption continues. Thus PF is still an attractive proposition for the lower income group," advises Raote.
VPF is an extension of EPF and hence, investors can opt for VPF only if they have an EPF account.
Mahesh Shukla, Founder of PayMe India also calls EPF or VPF the best debt instrument and the preeminent strategy for an individual's retirement goals even though it is taxable above 2.5 lakhs as post-tax returns are still higher than in any other venture.
"Interest on this additional amount is not taxable from subsequent years," Shukla adds.
Looking from the government perspective, Shukla explains that the interest rate on EPF is typically higher (8.5 percent) rather than other small savings schemes such as public provident fund, senior citizen savings scheme, Kisan Vikas Patra, and Sukanya Samriddhi and fixed deposit. This higher rate prompts employees to put higher corpus in EPF, which in turn makes it difficult for the government to pay interest on the same.
"Due to a higher fiscal deficit paying tax-free interest on PF becomes more and more unsustainable, so it’s a good move from the government to curb high-income earners from self-contributing more to their PF accounts in this unprecedented time," Shukla stresses.
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